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The Impetus for Investing in Biodiversity

Why funding nature makes financial sense, now more than ever

Before I went to college, I worked for a spider taxonomist for a summer. By most standards, it was a peculiar, if not unpleasant, species group to be working with. I wasn’t necessarily the biggest fan of creepy crawlies before this undertaking, but my boss then brought a special magic to the experience that made me utterly fall in love with them. “Look at the shape of that carapace!” he’d exclaim, and I’d look, and it’d be beautiful, and unlike anything I’d ever seen before.

I think spiders became for me then what species groups like birds, corals, butterflies, and plants are for many other people. Discovering biodiversity — the variability of life in the natural world, at the genetic, species, and ecosystem levels – is undoubtedly one of the purest joys of being outdoors, and the sense of wonder and natural curiosity it evokes in us is irreplaceable.

Ubin Pink Thomisid

Ubin Pink Thomisid; Photo by Rachel Lim

Besides its awe-inspiring, intrinsic worth, biodiversity also serves important functions in our physical and emotional worlds, in what is known as “ecosystem services”, including the regulation of our climate, the provision of food and medicine, cleaning of our water ways, and supply of recreational opportunities.

Unfortunately, most of these ecosystem services are not yet well-priced into our economy. Estimates put our dependence on nature at US$44 trillion of economic value — or over half of the world’s GDP. To protect that economic value, the United Nations estimates that over $4 trillion needs to be funded by 2050 to counter biodiversity loss. However, current investment into biodiversity stands at just $133 billion, or about 0.1% of global GDP, and the majority of that investment comes from public institutions.

Biodiversity serves important functions in our physical and emotional worlds, in what is known as “ecosystem services”.

Our failure to economically value biodiversity has led us to its rapid and unprecedented decline, with experts estimating that current rates of extinction are 100 to even 1,000 higher than natural rates.

The private funding gap needs to be filled quickly if we are going to address the biodiversity crisis, but there are financial reasons why investors should turn their lenses to biodiversity, besides the feel-good, altruistic motivations.

The loss of biodiversity is increasingly being recognized as presenting potentially catastrophic business risks across multiple industries, not least of all in agriculture, construction, energy, pharmaceuticals, and textiles. In fact, the World Economic Forum’s 2020 Global Risk Report listed Biodiversity loss among the top three risks, both in terms of likelihood and scale of impact, ranked above risks like interstate conflict and data fraud.

Colorful insect

The risks that biodiversity loss present come in many forms, both direct and indirect. To name a few:

  • Event-driven risks, like flooding or drought. Corals and mangroves provide urban populations with storm and flooding protection, and one study found that reefs reduced the expected damages from storms by over $4 billion. Without them, annual damages from flooding would double, and costs from frequent storms would triple
  • Long-term physical and climate risks, such as the reduction in rainfall caused by deforestation, since trees and soil biota play important roles in regulating the water cycle
  • Litigation and regulatory risks for businesses causing damage, such as fines for ocean dumping. For example, in March 2021, an international coalition of NGOs sued the French supermarket chain Casino for its alleged failure to prevent cattle industry-caused deforestation of the Amazon and Cerrado in Brazil and Colombia, and attendant human rights abuses against indigenous peoples

Banks and financial institutions are increasingly recognizing the potential of these risks and are building frameworks and coalitions to standardize how they report on and manage them.

Our failure to economically value biodiversity has led us to its rapid and unprecedented decline.

Perhaps the most established is the Task Force for Nature-Related Financial Disclosures (TNFD), currently in its beta version with an aim to be launched in 2023, to articulate what the risks are and what the metrics to measure them can be. Another notable commitment in industry to report on biodiversity is the Finance for Biodiversity pledge, made by 98 signatories including financial institutions with over €14 trillion in assets under management.

Whether or not investors themselves are obliged to report on their biodiversity impacts, these new frameworks will have implications for the successes of the businesses they invest in and their ability to raise funding from other institutions like banks. Beyond this negative motivation, however, there are also positive motivations for investing in businesses that bolster biodiversity: the potential of biodiversity credits, or offsets.

Insect with antenna

While the schemes and methodologies for generating biodiversity credits are still very much in their early stages, policymakers have begun to signal the formalization of biodiversity offsetting into law, such as the UK’s “biodiversity net gain” rule, where developers must compensate 110% for the ecological damage they cause through construction, or the $107M Biodiversity Credit Supply Fund set up with the NSW government in Australia.  Consumer demand has also increasingly pushed corporates to make biodiversity pledges or produce explicit biodiversity strategies, such as Nestle, L’oreal, and Kering. In a 2020 report by the Union for Ethical Biotrade (UEBT), 82% of survey respondents believed that companies have a moral obligation to ensure a positive impact on biodiversity.

Banks and financial institutions are increasingly recognizing the potential of these risks and are building frameworks and coalitions to standardize how they report on and manage them.

In other words, the biodiversity credit market is starting to have some of the characteristics of carbon market in its early days. And if the trajectory of the carbon markets over the past few years are any indication of what we can expect from the biodiversity markets, there is good reason to believe there will be increasing demand for biodiversity credits, bolstering their prices and strengthening the case for investing in nature.

Investors can capitalize on rising biodiversity markets not only by making investments directly into conservation projects and Nature-based Solutions (NbS), but also, into the “nature-technology that enables the measurement of nature positive outcomes and provides transparency in the value that NbS projects deliver.

However they choose to participate, one thing is clear: the time is now. Climate change is only one part of the equation when it comes to environmental destruction, and is closely intertwined with biodiversity. It’s important that we avoid carbon tunnel vision as sustainability strategies are built into our investment portfolios, evaluating projects holistically rather than in silos.

Rachel Ashton Lim is an impact investment analyst at Silverstrand Capital, a Singapore-based family office which invests in biodiversity and the regenerative economy. She holds a dual degree from Claremont McKenna College in Biology and Environmental Policy. Rachel is passionate about restorative justice, environmental protection, and in the innovative, intersectional ... Read more
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